Life is full of unexpected surprises, and some of them can really hurt your budget. Emergency situations such as repairing a car, replacing an appliance, paying a high medical bill or an unexpected trip can deplete your savings or cause you to make unwise decisions that could affect your financial future.
Johnson tells Investopedia that answering these questions is the first step to increasing financial literacy. You need to decide how much money you need. If it's a worst-case scenario like a layoff, develop a household budget first. "Add up all your expenses: fixed, like car insurance and mortgage, and variable, like groceries and entertainment."
Once you determine how much money is needed, you are ready to evaluate ways to reach your goal.
Automatic savings in a separate account
Instead of keeping all your money in one account, Johnson recommends putting it in a separate emergency savings account. "If you just say you're going to save more and leave it in a joint checking or savings account, you won't be able to see the money grow," Johnson explains. However, he says it's an incentive to keep it in a separate account where you can see it grow.
In addition to the money into a separate account a certain amount is withdrawn regularly. Chris Britt, co-founder and CEO of San Francisco-based banking app Chime, tells Investopedia, "Instead of deciding what to save each week or month, sign up for an automatic savings plan."
So how much should you put in your emergency fund? Dave Harding, president of Hardin Financial Group in Troy, Michigan, recommends 10% of your income until you have at least three months of income saved up. "Replace any money spent from the fund as soon as possible, or the emergency fund will only work once," Harding warns.
Consider interest rates and cash back options
Sometimes a few small steps can lead to significant savings. "Maximize your dollar by choosing a banking option that offers cash on debit purchases," advises Britt. It also recommends taking interest rates into account when choosing a savings account, as the money from premiums and rates can add up over a period of time.
Pay off debts
Your financial obligations may limit the amount you can contribute to your emergency fund. Britt recommends paying more than the monthly minimum, which will reduce the growing interest costs and allow you to pay off the debt faster so you can add that money to your emergency fund.
And Joe Heider, founder of Cirrus Wealth Management in Cleveland, Ohio, says, "Take a look at your credit card debt to see if you might be able to roll that debt into a lower interest rate and use the savings to start an emergency fund."
Get a part-time job
Consider using your skills by getting a part-time job to generate additional income for your emergency fund. Harding warns that timing is critical. He says working to save money for a future crisis is fine, but it won't help if you need the funds now.
He also recommends "special" income from bonuses and tax returns to your emergency fund .
Sell, scrap or pawn your assets
Most people have accumulated unused items that take up space and collect dust. Johnson recommends selling anything you no longer use. "The same can be said for excess metal in the garage, such as copper pipes, aluminum and steel, which can be sold to a scrap yard," Johnson says. He says old brass chandeliers can also be sold in the attic and recommends pawning jewelry that has little or no sentimental value.
Refinance Your Home
If you have equity in your home, Heider recommends Investopedia readers refinance it. "Although interest rates have gone up, they are still low and now is a good time to do so and use savings in an emergency fund."
Dolph Janis, founder and owner of Clear Income Strategies Group in Charlotte, North Carolina, offers three more tips to help save money:
" Ordering water instead of a drink with lunch / dinner. Take the extra € 3.00 and put it later in a savings account. Do the math if you do this ten times a month, that's an additional $360 savings per year.
Check your phone bill. Need both a home phone and a cell phone? Need this plan? You could easily save $40 per month here, or another $480 per year.
Check your cable or satellite bill. Do you need all of these channels? Potential savings here of $35 per month, that could be another $420 per year. "
Janis concludes these three changes will save you an additional 1 each year.Could save $260 by distinguishing between needs and wants. p>